One for You, Nineteen for Me

Thanks to my esteemed colleague Nemo Paradise, our readers have gotten a magnified look at a helpful chart (courtesy of right-wing think tank the Heritage Foundation) showing that the U.S. corporate tax rate is the second-highest among developed countries, and that European nations in particular have lowered their rates over the past two decades, in contrast to the U.S.’s which has actually inched up.

Now hold on a second! Contrary to the implication of Nemo’s headline, no one is advocating raising the corporate income tax rate. In 2007, before Rep. Charles Rangel’s ignominious gravitas-shrinkage, the then-Chairman of the House Ways and Means Committee proposed cutting the corporate tax from 35 to 30%, while eliminating tax breaks.

In short, what people want to increase is compliance, by eliminating loopholes and deductions. For example, when U.S. companies earn profits overseas they don’t have to pay any U.S. income tax until they transfer the money back to the States. Which, naturally, they tend not to do. Taking advantage of the federal government’s sometimes (arguably) ill-conceived “green” initiatives can net companies outsized tax breaks too.

According to Office of Management and Budget statistics, corporate tax revenues are near historic lows: as a share of GDP, corporate tax revenue has sunk from near 3% in 2006 to just over 1%. The Center for Budget and Policy Priorities notes that “when measured as a share of the economy, U.S. corporate tax receipts are actually low compared to other developed countries.” That’s no surprise considering that some huge U.S. corporations pay little or nothing in U.S. income tax. Google “moves most of its foreign profits through Ireland and the Netherlands to Bermuda,” according to Bloomberg, greatly reducing its tax burden through this perfectly legal “transfer pricing” technique. Facebook plans a similar strategy. In 2010 Apple kept over $30 billion in cash overseas. Boeing paid no federal taxes in 2009, nor did General Electric.

Screaming headlines aside, few people are seriously advocating suddenly hitting these companies with gigantic, even punitive tax bills. What is called for is reforming the tax system into a fairer, more equitable shape. Some companies would end up paying more, some less; overall revenue would increase, aiding the economy’s recovery.

An equally important increase would be seen in the public’s sense of fairness. The more these stories about companies tucking their profits overseas are circulated, the more outraged individual taxpayers are likely to get. I can envision a near future in which our economy works like Greece’s has in recent years, with more and more transactions occurring under the table (“Cash only!”) to avoid record-keeping and the consequent paying of taxes. The U.S. government will be even more broke than it is now, and like Greece, we’ll end up with beautiful scenery, a healthy tourism industry – and rioting in the streets.